Entrepreneur: Be Fair to Your Other Owners When Selling Your Company


You started your company. As you grew you issued stock to key employees or issued stock to investors to raise capital.

The company grew under your management. You are the CEO of the company, a board member, and as majority shareholder, you control the board of directors.

You are approached by a company that wants to buy you out. The buyer offers you a so-so price for your company. But the buyer wants you to run the business for the buyer. And the offer includes a very lucrative compensation package consisting of a seven-figure retention bonus, a base salary much larger than your current base salary, and equity incentive compensation with great upside potential.

You like this deal and want to take it. Does this present any legal problems?

In short yes. When selling your company, as a board member, controlling owner, and officer, you must take efforts to achieve the highest value reasonably attainable for the other owners. Failure to do so breaches your duty of loyalty and your duty of due care to the other owners

The deal

In this recent case, the company was sold for $1.3 billion.  The buyer’s original $20 per share offer was rebuffed by the company’s officers and board. Later, the officers and board agreed to a $21.50 pers share price. In the accepted deal, the buyer would retain the company’s current officers and directors.

As part of the deal senior management and the company’s board member would receive six and seven figure cash out payments for equity awards, including Target’s CEO $4.9 million cash out payment. Furthermore, retention bonuses would be paid 3 years after the closing. $5.5 million for Target’s CEO and $1.25 million each for the other four officers.

The lawsuit

Even before the deal closed, a shareholder demanded to see the company’s books and records about the deal, including any personal emails of the company’s officers and directors. The company denied the request and the stockholder went into a Delaware court to obtain the books and records.

The shareholder wanted to investigate whether the company stockholders had been underpaid by the buyer because the officers and directors had breached their duties of due care and loyalty owed to the shareholders. Specifically, the stockholder was concerned that the officers and board members took buyer’s deal not because of the purchase price was the highest value reasonably attainable but because of the generous compensation buyer agreed to pay to retain them as officers and directors of the company after the closing.

The stockholder argued that the board and officers may have gotten a better price either with buyer or another suitor. However, the stockholder said that the officers and directors did not explore other potential suitors. Furthermore, the stockholder suspects that management’s projections that were used by the company’s investment banker to evaluate buyer’s offer, were too low; ignoring very promising future revenue on a significant project.

The court ordered the company to produce the books and records including the relevant personal emails of the company’s officers and directors. The court noted that the stockholder did not have to offer much evidence in support of its books and records request.

This case is referred to Inter-Local Pension Fund GCC/IBT v. Calgon Carbon Corporation, C.A. No. 2017-0910-MTZ, Court of Chancery of Delaware, (Decided: January 25, 2019).


The court’s order to the company to produce the books and records does not mean that the board or management did anything wrong. It just gives the stockholder the right to investigate to see if any wrongdoing occurred.

Remember: if you control a company that has other owners; treat them fairly. There are legal consequences to you if you don’t.

By John McCauley: I help businesses minimize risk when buying or selling a company.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

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